5 Ways Hospitals Can Cut Costs, Achieve Long-Term Stability

Nothing sparks action like a crisis. During the early days of the COVID-19 pandemic, health systems nationwide were forced to rethink and retool nearly every aspect of their operations. In some cases, like the rapid roll out of telehealth, they removed bureaucratic barriers that historically slowed things down.

While the pandemic, combined with the resulting economic rollercoaster, raised several immediate challenges, the past few years also exacerbated systemic problems plaguing providers -- rising costs, staffing shortages, evolving payment mechanisms, and an aging patient base, to name a few. These headwinds are enduring, leaving health systems no choice but to embark on large-scale transformation.

This article launches a series in which we will examine the dynamics impacting providers and, importantly, how they can respond to ensure they are positioned to stay viable for years to come. Over the next several months, we’ll dive into opportunities for providers to rein in costs, drive growth, expand adoption of value-based care, unleash technology to improve productivity, and remove organizational and cultural barriers to innovation.

The Burning Platform

Hospitals are experiencing a bit of a Tale of Two Cities scenario. Some financial indicators are pointing up through the first few months of 2024. Operating margins have rebounded from historic lows during the pandemic and net revenue per calendar day in February grew 26% compared to the same time in 2021. At the same time, total expenses grew nearly 20% over the same period of time. And the data does not account for losses incurred during the Change Healthcare cyberattack, which some estimates peg at nearly $2 billion a week due to delays in claims processing.

Several factors impacting future revenue add to a lingering sense of uncertainty. The end of stimulus funds and reimbursement enhancement from public health emergencies will reduce safety valves, while the restart of Medicaid redetermination has pushed millions of patients out of Medicaid, potentially leading to greater long-term costs associated with preventable emergent care.

Perhaps the greatest long-term impact to future net revenue is the shift of the population out of commercial insurance into Medicare. Before the pandemic, 59% of the country’s insured were enrolled in commercial plans. By 2030, this figure is projected to drop to 55% as enrollees age into Medicare. Although only a four-percentage point shift, the health system revenue impact is greater as tens of millions of enrollees age into a patient segment that utilizes more services at 30% of commercial reimbursement rates.

The aggregate impact of these forces will bring systemic change to the industry. Assuming continued cost growth, lagging reimbursement rate growth, and continued disproportional Medicare growth, we estimate that health systems will need to reduce operating expenses by 15% to 20% by 2030 to stay viable in an increasingly competitive landscape. Systems have already started down this path with austerity measures and headcount reductions. However, fully realizing this level of cost reduction is an enormous undertaking that will require tough decisions, impactful operations redesign, and rethinking of the care delivery chassis.

5 Categories of Cost and Operating Model

Transformation Efforts Work across five categories of cost and operating model tactics can help set health systems on the path to achieving long-term sustainability:

1. Continue focus on traditional, high-value operations optimization efforts. The traditional playbook of generating sustainable value through process redesign is still effective. These efforts are impactful in both the hospital and medical group settings. Here are some key areas of focus:

• Staffing poses the greatest immediate challenge. Redesigning key processes and teaming models can offer relief to a tired workforce and reset the cost structure. Oliver Wyman laid out five key principles to mitigate the risk of the nurse staffing shortage.
• Perioperative services are traditional margin drivers for systems and are often rife with value generation opportunities that can be captured through greater throughput. Examples include OR specialization, unused block time elimination or turnover time reduction.
• Length of stay reduction is a key tactic in environments with fixed payments and excess demand. Enhancing sepsis detection, managing towards a discharge date, standardizing discharge rounds, and optimizing the post-acute network are all high-impact levers.
• Administrative function assessments incorporating the voice of internal customers uncover opportunities to consolidate redundant work and streamline the most important work. Zero-based budgeting is then leveraged to align resources with the most critical services.

This playbook traditionally generates 5%-7% of annual cost savings—an impressive figure, but not enough to prepare for broad industry changes. Health systems need to consider and enact more innovative strategies to reduce costs.

2. Leverage technology to improve productivity. Effective and strategic technology deployments accelerate operations optimization. Although it has been around for some time, interest in and availability of artificial intelligence tools present a new opportunity for health systems to augment and automate processes as a means of improving productivity and reducing administrative burdens. Yet, technology itself will not save healthcare. Rather, health systems should develop a framework for identifying and assessing which processes can benefit from automation or augmentation. Broad application of appropriate augmentation and automation can generate an estimated 3%-4% of cost savings.

3. Rethink and redeploy sites to align with changing care delivery and payment models. Care continues to shift out of traditional cost centers as less-invasive treatments develop, payor pressures intensify, and new technological developments enhance feasibility of care at home. Considering the factors, health systems should reframe how they currently deploy and plan for future brick-and-mortar locations. Three groups of sequential tactics can reshape the use and scale of physical care delivery sites: 1) shift care to the best, lowest cost site; 2) create focused centers of excellence where volume allows; 3) optimize bed mix and consolidate footprint based on new utilization trends. These three groups of tactics can generate an estimated 7-8% of savings.

4. Treat value-based care like a service line. Executing against all the summarized cost transformation efforts is difficult, and given the variability of each system’s starting point, achieving the 15-20% savings target is uncertain. Health systems should close the remaining gap with movement towards value-based care and payment models. That means building a chassis around prevention and wellness. The goal should be to keep patients out of expensive inpatient settings. Designing care models and investing in the right capabilities enables systems to tap into highly valuable business. A system managing the care of 50,000 Medicare patients, generating $2,000 per member per year savings, produces $100 million in incremental revenue opportunities.

5. Refine the operating model to drive transformation. Regardless of a system's orientation towards fee for service or value-based care, the operating model must be designed to enable execution of all the new processes and care models defining cost transformation 2.0. Transformative ideas are only as good as their execution. Successful operating models apply a structured approach that allows for inclusive design of innovative solutions, swift implementation, constant monitoring, and opportunities to refine or redirect. Often overlooked, the structure that drives and monitors execution is just as important as the new processes and care models necessary for health system stability in the future.

The pandemic presented a once in a generation crisis requiring providers to quickly develop new capabilities, exercise efficient decision-making, and tighten operations to remain viable. Health systems now need to leverage the valuable lessons from this time to propel them through these four tranches of transformative work to achieve long-term sustainability. We will dig deeper into some of these areas throughout this series.